Ever been in an exam room and a certain question looks very simple yet the answer looks too far?
Check out question 2 (a) (i)
In relation to time value of money, describe three interpretations of interest rates (3 marks)
Suggested answer
Interpretations of interest rates
- Required rate of return – this is the return required by investors or lenders to postpone their current consumption
- Discount rate – is the rate used to discount future cash flows to allow for the time value of money (that is, to bring a future value equivalent to present value)
- Opportunity cost – is the most valuable alternative investors give up when they choose what to do with the money
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